We are focused on sectors with secular expansion potential and prefer a domestic tilt where necessary

There is little doubt that some of the biggest risks to equity markets last year, depressed commodity prices, slowing growth in China, uncertain economic data points in Europe as well as the US, all accompanied by dollar strength – will affect 2016 as well.

We continue, however, to be constructive about the outlook for US equities, encouraged predominantly by ongoing strength in the employment market, increased evidence of rising wages, better household balance sheets, and robust consumer confidence.

Strong consumer to drive US growth

We are optimistic about the prospects for US growth based on the strength of the consumer, which ultimately accounts for two thirds of the economy.

Based on current activity indicators, we believe the US economy is growing 2-3% annually, roughly in-line with trend-line GDP growth which, when combined with moderate increases in corporate profitability, 1-2% stock repurchases, and modest multiple expansion, can provide attractive equity returns.

Further earnings revisions associated with those companies more exposed to oil and other commodity prices, emerging markets, and/or further dollar strength.

Certainly, slowing growth in China, subdued commodity prices, and uncertain economic data points in Europe and the US could lead to increased levels of volatility.

But given greater levels of dispersion associated with this volatility, this should provide an environment in which active management could differentiate itself from an asset management industry, struggling to beat its benchmark over the last five years.

Industry disruption creates secular growth opportunities

We see continued investment opportunity in the technology sector, our biggest overweight, as cloud computing usurps traditional business models in areas like enterprise resource planning and human resources.

The cloud offers lower total cost of ownership, faster time to market, and more flexible and user-friendly interfaces.

Also, as consumers spend more time online and on mobile devices, historical means of monetisation and commerce will give way to newer, disruptive approaches.

A stronger consumer, shopping online

We’re also constructive on the US consumer, emboldened by upward pressure on wages associated with improving employment and lower gas prices.

In US pharmaceuticals and biotechnology there are myriad, late-stage drug pipelines that are undervalued by Wall Street, in lieu of overvalued single-drug franchises that haven’t shown research and development efficacy and are a focus for competition/generic substitutes.

But our enthusiasm is tempered heading into an election year as the time of unchallenged pricing in pharmaceuticals is coming to an end.

Direct government intervention is unlikely, but multiples will be constrained.

Industrials face multiple challenges

As we look at depressed commodities, particularly oil and gas, and at China battling to shore up weaker growth, it’s difficult to be constructive on industrials, so we are underweight this sector.

Instead, we focus on the secular growth evident in certain pockets such as environmental/analytics, auto manufacturing, residential construction/HVAC (heating, ventilation and air conditioning).

Strong US dollar points to domestic exposure

As interest rate differentials persist, the result of US Federal Reserve monetary policy tightening versus European and Japanese QE, dollar strength should remain a theme in 2016.

Accordingly, we must be mindful of multi-national sales sensitivity in those areas of the S&P 500 (34% exposure to international overall) which have the highest overseas sales.

We are optimistic about the prospects for US growth based on the strength of the consumer.

These include the technology (roughly 50% exposed to international sales), materials (45%), and industrials (40%) sectors.

In technology, we feel confident that our stronger secular growth will overwhelm headwinds from dollar strength, while in industrials and materials the impact to multi-nationals was quite evident in 2015.

As such, at the margin, we’ve tried to emphasise domestic versus international exposure.

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